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Are you long Mannkind Corp (NASDAQ:MNKD) in anticipation of FDA results for Afrezza? Are you getting inpatient? I don't blame you ...

Although MNKD has already completed the time consuming task of recruiting patients for Afrezza's Phase III clinical trials, the two studies are not expected to be completed until the second quarter of 2013. Mr Mann, MNKD's CEO, said:

"Completing patient recruitment is the initial element, and often the lengthiest, in the conduct of large scale Phase III clinical trials," claimed Alfred Mann, Chairman and Chief Executive Officer. "Both studies are on track to be completed in the second quarter of 2013 and we expect to report top-line results next summer. Our objective is to resubmit the NDA for AFREZZA in the third quarter of next year."

There will be two studies performed: The first of the studies, study 171, is for patients with type 1 diabetes. After patients are optimized on their insulin regimen, at least 471 subjects will be randomly selected to one of three arms for mealtime insulin. There will be a control arm, in which patients will inject the rapid acting insulin, while others will be given the insulin using the MedTone inhaler, and the next-generation inhaler. There will be a 12-week observation period on stable doses of the mealtime insulin to assess HbA1c levels, which is the primary outcome measure.

The other study, study 175, will evaluate AFREZZA using the next-generation inhaler in patients with type 2 diabetes whose disease is inadequately controlled. After an initial stage where the patients will remain on their oral medication, at least 328 of the patients will be randomized to additional treatment with AFREZZA or to a placebo. The study will have a "titration period", followed by a 12-week evaluation period to access the results.

With top-line results for Afrezza expected "next summer", and the scheduled resubmission of the NDA expected even later in the "third quarter of next year"; the painful reality is MNKD lacks a meaningful catalyst over the next several months.

However, Mr. Mann predicts, "...Both studies are on track to be completed in the second quarter of 2013..."

In my judgment, this is the nearest predictable catalyst that can meaningfully move the stock. Since the second quarter equates to March 2013 or later, there are several interesting strategies to help ease the pain of those already holding MNKD shares, and also for those patiently waiting for an entry point. These strategies will offer similar returns, and have very comparable risk profiles. But the best part is options in MNKD command very appealing premiums; so why not harness some of this excitement?

Long Shares Already?

Looking out several months, selling covered calls against existing shares before the results are announced in Q2 2013 seem attractive. Let's say we are long shares of MNKD and today's closing share price is $2.17/share. Looking out to February expirations, there are two reasonable contracts we can consider:

1) Sell to Open the February 2013 2.50 strike for $.13 in premium.

This option caps our upside at $2.63/share, or 21% higher than current prices. We gain the immediate $.13 in premium, or nearly a 6% bonus relative to current share price of $2.17. The main advantage is if shares are relatively unchanged or even fall slightly, we gained this extra premium to compensate for this stagnation in shares over the next 2 months.

2) Sell to Open the February 2013 2.00 strike for $.30 in premium.

This option caps our upside at $2.30/share, or only 6% higher than current prices. We gain the immediate $.30 in premium, or nearly a 13.8% bonus relative to the current share price of $2.17. This option could be beneficial to a shareholder who already has considerable gains, perhaps after buying around $1.75-1.90 a share or so, and wishes to lock some gains.

Still Waiting for Entry?

If you are excited with the risk/reward profile of MNKD over the next year and are looking to pick up some shares before the stock's big catalysts unfold, you probably already have a limit order in right now for about $2.00/share, or possibly slightly lower. In my opinion, a better alternative to a limit order is to sell a put option. From my point of view, selling a put is very similar to setting a limit order, yet offers you some reward if the stock is not triggered to you. Let's discuss two examples that are reasonable:

1) Sell to Open the February 2013 2.00 strike for $.20 in premium: An alternative to a limit order at $1.80/share

This put is similar to placing a limit order for about $1.80/share. If the stock falls below $2.00/share, we must assume we'll be exercised to buy the shares for $2.00/share. However since we've already collected the premium of $.20, we are basically drawing a line in the sand at $1.80/share. The advantage is if MNKD doesn't dip below $1.80/share by February expiration, we've actually made a small profit, compared to sticking our necks out with a limit order with little to show for it.

2) Sell to Open the February 2013 2.50 strike for $.50 in premium. An alternative to a limit order at $2.00/share.

This put is similar to placing a limit order for about $2.00/share. If the stock stays below $2.50/share, we must assume we'll be exercised to buy shares @ $2.50/share; a much more impatient strike to sell than option #1. But since the premium of $.50 is a big intake, we are basically break even at $2.00. This option is a great alternative to an investor anxiously considering buying shares at current levels, in my opinion.

Summary:

Both selling covered calls and selling puts have their quirks. The disadvantage of missing out on upside while possibly being exposed to worst case scenario downside is definitely a huge disadvantage in this strategy. However the advantages, which I briefly summarized after each of these 4 contracts, could offer meaningful additions and/or alternatives depending on the investor's outlook, as well as their buy price or anticipated buy price.

However, in light of the inherent risks in these positions, we reduced our chances of big losses by choosing the February expiration set of contracts. Since the results of the Afrezza phase III trials, (the nearest meaningful catalyst) aren't due until 2Q 2013 or March at the earliest, the February dated contracts are a reasonable consideration since they avoid this wild card event.

Have a longer term bullish view on MNKD and want to satisfy your appetite for big upside gains? Consider buying call spreads, explained in my prior article.

Thank you for reading.

Source: Long Mannkind? How To Make Money While In Queue